Hollande set for EU summit showdown with Merkel

May 22, 2012|Reuters

* Euro zone bonds debate set to dominate growth summit

* France's Hollande faces big test at first EU gathering

* Traditional Franco-German accord under strain

By Luke Baker

BRUSSELS, May 23 (Reuters) - European leaders will exploreways of breathing life into their stricken economies at a summiton Wednesday, but the issue of euro-zone bonds and whether theycan help alleviate two years of debt turmoil will dominate themeeting.

Prime Minister Mariano Rajoy of Spain, where the economy andbanking system are at the frontline of the crisis, will meetnewly elected French President Francois Hollande in Paris aheadof the evening summit to discuss policy positions - a markedshift away from the traditional Franco-German axis.

At nearly all previous summits over the past two years,Hollande's predecessor Nicolas Sarkozy met German ChancellorAngela Merkel beforehand to fix a strategy, prompting criticismfrom other leaders about diktats from Paris and Berlin.

In that respect, Hollande's victory has significantlychanged the terms of the debate, with his call for greateremphasis on growth now a rallying cry for other leaders. Thathas set up a showdown with Merkel, who supports growth but whoseprimary objective is budget austerity and structural reform.

In his first EU summit, Hollande has also chosen to make astand on euro bonds - the idea of mutualising euro zone debt -despite strong German opposition to an idea that has been hotlydebated for more than two years.

He will have support from Italian Prime Minister Mario Montiand European Commission President Jose Manuel Barroso, amongother leaders. But Merkel shows no sign of dropping herobjections to the proposal, which she has said can only bediscussed once there is much closer fiscal union in Europe.

The Netherlands, Finland, Austria and some smaller euro zonemember states support her in that position.

"(Euro bonds) are the wrong prescription at the wrong timewith the wrong side-effects," Germany's deputy finance minister,Steffen Kampeter, said this week, a position further underlinedby other German government officials on Tuesday.

No decisions will be made at Wednesday's summit, which isintended to promote ideas on jobs and growth ahead of anothermeeting at the end of June, but it is clear that the debate overeuro bonds and related bank rescue concerns will be intense.

EURO BONDS "ROAD MAP"

Olli Rehn, the European commissioner for economic affairs,threw his weight behind the proposal on Tuesday, saying it wastime for a "road map" setting out the legal and fiscal stepsneed to bring about euro-zone bonds in the years ahead.

And Herman Van Rompuy, the president of the EuropeanCouncil, the body which represents EU leaders, said heads ofstate and government should abandon taboos as they think aboutthe future of Europe and its economic framework.

"It is not too early to think ahead and to reflect onpossible more fundamental changes to economic and monetaryunion," he wrote in a letter to the 27 EU leaders.

"In many ways, the perspective of moving towards a moreintegrated system would increase confidence in the euro and theEuropean economy generally."

As well as exploring ways of resolving the sovereign debtproblems that have torn the economies of Greece, Portugal andIreland apart and threaten the stability of the euro, theleaders will assess how to stabilise their banking systems.

Spain is a particular concern, with a number of its banksladen with bad debts incurred by excessive lending during aproperty boom that has long since turned to bust and still hassome way yet to go before it touches bottom.

The total amount of bad debt is estimated at more than 180billion euros ($240 billion), while efforts to recapitalise andrestructure the stricken banks have so far fallen short.

One proposal on the table is for the euro zone's rescuefunds to be allowed to recapitalise banks directly, rather thanhaving to lend to countries for on-lending to the banks.

But that is another idea with which Germany isuncomfortable, even though Merkel said on Tuesday it wasnecessary to come up with a way of dismantling banks acrossborders, a possible nod to a pan-eurozone bank restructuringscheme.

PROJECT BONDS

The formal agenda of Wednesday's meeting is jobs and growth,and specifically three ideas policymakers hope will provide somenear-term stimulus to the European economy, which is barelygrowing and threatens to slip into recession.

On Tuesday, agreement was reached with the EuropeanParliament on 'project bonds', instruments backed by the EUbudget that can be used to finance energy, transport andtelecoms projects alongside private sector investment.

A pilot programme, using EU capital of 230 million euros,will run until 2013 and if successful could lead to up to 4.6billion euros of new investment, EU officials say.